The First Step for The Agency of the Future: Become a Well-Run Business

Transformation efforts and pronouncements abound in the industry today.  There are agency mergers, the creation of consulting operations, the engagement of analysts, reorganizations, hiring and firing of senior executives and thousands of words about new priorities, new capabilities and new ambitions.  Here are a few of the things being said today:

• The ongoing mission of clarifying, simplifying, and unifying [our agency] … remains my highest priority for restoring the company to growth for today and tomorrow.
• Thanks to the fragmented media landscape and new emerging technologies, this industry must go back to [its] roots, creatively solving short term business problems… while at the same time building a brand.
• Technology will be at the heart of (our) transformation.
• One of [our] highest priorities… is to raise the creative standards and quality of work across the [entire Group].
• The pendulum has to swing back to human ingenuity, like storytelling and ideas, which is where tech companies fall off.

What most of these priorities fail to note, though, is that they are not economically feasible on a sustainable basis under today’s business conditions. In order to transform themselves into Agencies of the Future, agencies first need to improve their business operations so they can hire the right kind of talent at competitive salaries and deploy their new skills on behalf of clients. The first step for the Agency of the Future is to fix its sub-optimal business practices. This requires immediate efforts in the following areas:

1. Improving fees and upgrading the quality of Scopes of Work.  Seventeen years ago (2002), according to research I completed for my book, “Madison Avenue Manslaughter,” agencies were paid (in 2018 dollars) $513,477 per “ad” for the creative work they completed.  This work was in TV, print and radio.  Creatives had up to seven weeks to complete each deliverable.  There was a considerable amount of strategic thinking for the work. Agency people were then well-paid.

By 2018, a typical traditional agency that included digital and social scopes of work was being paid an average of only $5,700 per deliverable, and creatives were cranking out one deliverable per day.  The huge number of small social deliverables (Facebook, Instagram, e-mail marketing, etc.) has overwhelmed the economics and logistical capabilities of agencies.  The work is not strategic, and it is being carried out by very junior people. Worse, there is some consensus today that this mix of work is not effective in the marketplace; brands are still stagnant.

The digital and social revolution has turned agencies into something like fast food operations, when in the past they were gourmet French restaurants.  The work has become less effective and more commodity-like.  The current mix of fees and Scopes of Work does not provide a viable economic platform to underwrite agency transformations.  More digital and more social work will only make this situation worse.  Agencies need to take control of scopes of work and fees to improve quality, effectiveness and financial resources.

2. Upgrading agency talent and salaries.  Agency executives, particularly in account management, are undertrained and underpaid compared to similar executives in the consulting firms, like Accenture and Deloitte.  Data from Glassdoor shows that representative client-facing agency salaries are about 50% of Accenture and Deloitte salaries for mid-level New York account managers and manager executives with 4-6 years’ experience -- $76,500 versus $147,500.  Transformed agencies will require sophisticated mid-level executives who can thoroughly engage with their clients to solve business issues, like underperforming brands.  This will require a considerable amount of analytical and strategic expertise.  Currently, there is an agency deficit in talent, training and salaries.

To pay for the required talent for agency transformations, agencies need to upgrade their fee levels. This is possible today only if agencies document the work they do and negotiate fees based on scopes of work rather than on client-controlled, benchmarked salaries and overhead rates. My analyses show that agencies are currently underpaid by 15-30% for the work they do -- and their poor scope of work documentation and negotiation practices are root causes of the problem.

Senior agency executives have largely undermanaged agency business operations in the past, resorting to downsizings to generate margins rather than gaining control over prices and fees. As agencies are being threatened by technological change and new competitors, now is the time to upgrade business practices to afford the required transformations.

Business matters must come first. The Agency of the Future will require a lot of investment, and today’s business practices cannot put them on the right path.

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